J. Welles Wilder Jr.

J. Welles Wilder Jr. (1935–2021) was a trailblazing American mechanical engineer who became one of the most influential figures in the world of technical analysis. Frustrated with the subjective and often vague trading advice of his time, Wilder applied his engineering mindset to the financial markets, developing a set of precise, mathematical formulas to interpret price movements. In his seminal 1978 book, “New Concepts in Technical Trading Systems,” he introduced several now-famous technical indicators that are standard features on virtually every trading platform today. These tools, including the Relative Strength Index (RSI), Average True Range (ATR), and Parabolic SAR, were designed to measure market dynamics like momentum, trend, and volatility. While Wilder's work is the bedrock of modern technical trading, his focus on price action stands in stark contrast to the value investing philosophy, which prioritizes a deep understanding of a business's underlying intrinsic value over charting its stock's daily whims.

Before revolutionizing trading, J. Welles Wilder Jr. was a successful real estate developer. This background, combined with his training as an engineer, gave him a unique perspective. He saw the market not as a place of stories and emotions but as a system of forces that could be measured and calculated. He wasn't interested in a company's balance sheet or its management team; he was obsessed with the data generated by the market itself: price and volume. This systematic approach is the polar opposite of value investing. A value investor pours over financial statements to determine what a business is truly worth. A technical analyst like Wilder looks at a price chart to predict where the price is likely to go next. To put it simply, the value investor studies the object (the company), while the technical analyst studies the shadow (the stock price). Wilder’s genius was in creating some of the most sophisticated tools ever designed for studying that shadow.

Wilder didn't just invent one tool; he created an entire suite of indicators that work together to provide a comprehensive view of market action. His most enduring creations are used daily by millions of traders.

The RSI is a momentum oscillator that measures the speed and change of price movements on a scale of 0 to 100. It's the market's pulse-taker.

• How it works: It compares the magnitude of recent gains to recent losses. A high RSI (typically above 70) suggests an asset is becoming overbought, meaning its price has risen quickly and may be due for a pullback. A low RSI (typically below 30) suggests it is oversold and its price may be due for a bounce.
• A Value Investor's Caution: The term “oversold” is dangerously seductive. For a technical trader, it's a potential buy signal. For a value investor, it's just a sign of recent selling pressure. A fundamentally poor company can stay “oversold” for a very long time, becoming a classic value trap.

The ATR is the market's volatility meter. It doesn't tell you which way the price is going, but it tells you how wild the ride is.

• How it works: ATR calculates the average “true range” of price movement over a given period, accounting for any gaps between a day's closing price and the next day's opening price. A high ATR means high volatility; a low ATR means the stock is trading in a narrow range.
• Practical Use: Its most common application is in risk management, particularly for setting a stop-loss order. A highly volatile stock (high ATR) requires a wider stop-loss to avoid being shaken out of a position by normal daily noise.

This is a trend-following indicator designed to identify potential reversals. Its name, “Parabolic Stop and Reverse,” perfectly describes its function.

• How it works: It appears on a chart as a series of dots either above or below the price. When the dots are below the price, it signals an uptrend; when they are above, it signals a downtrend. When the price touches or crosses the dots, it signals that the trend may be reversing, providing a potential exit or entry point. It's often used as a “trailing stop” that follows a profitable trade.

The DMI is a comprehensive system for determining if a security is trending and, if so, how strong that trend is.

• How it works: It consists of two lines, the +DI (Positive Directional Indicator) and the -DI (Negative Directional Indicator), which measure upward and downward price pressure. When the +DI is above the -DI, bullish momentum is stronger. The system also includes the Average Directional Index (ADX) line, which measures the strength of the trend (regardless of direction). A rising ADX indicates a strong trend, while a falling ADX suggests a weak or non-trending market.

So, what should a dedicated value investor make of J. Welles Wilder Jr.? Should you dismiss his entire body of work as market voodoo? Not necessarily. While his tools should never be the reason you buy a stock, they can occasionally be useful. Imagine you've done your homework. You've found a wonderful business run by honest managers, and its stock is trading for significantly less than your calculated intrinsic value. You're ready to buy. Here, an indicator like the RSI might offer some tactical insight. If the RSI is extremely low (e.g., below 20), it suggests market sentiment is at rock bottom, potentially offering you an even better entry price. Conversely, if you own a great stock that has run up in price and the RSI is flashing “overbought” at 90, it might prompt you to review your valuation and consider if the price has gotten ahead of itself. Ultimately, Wilder's indicators are tools for reading the mood of Mr. Market, the famous character created by Benjamin Graham to personify the market's irrational swings. Wilder's life's work was to mathematically decode Mr. Market's manic-depressive behavior. The value investor's philosophy, however, is not to predict his mood but to exploit it—to buy from him when he is pessimistic and sell to him when he is euphoric. For the value investor, a solid understanding of the business is the cake; Wilder’s indicators are, at best, a sprinkle of optional icing.